Best way to position your portfolio is to be long apps and short banks

By Cody Willard

You can search for the best five apps for your own interest, hobby or profession (ie, golf, Droid, art, NFL, music, trading, etc) using the search box below and click through to AppConsumer:

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I launched a tech hedge fund at the bottom, in October 2002, when the Nasdaq was down 75% over the last twenty four months. I closed it at the top, in October 2007, when I had gotten bearish on the markets and bearish about the hedge fund business itself. And when I used to run a hedge fund, I literally did a lot of hedging. There were times I was long the telecom equipment component suppliers like JDSU and XLNX and be short the telecom service providers like Verizon and Global Crossing. Likewise, there were times I’d be long Google and short Yahoo as Google was on its unstoppable tear and Yahoo was on its endless stumble. I looked for pairs of stocks and/or ETFs to pair up against each other to try to hedge the overall portfolio against wild fluctuations in the markets.

In my Revolution Investing model portfolio, I also look at hedging strategies and after having been very aggressively long and outlining a lot of call option strategies that turned out to be very profitable for subscribers, more recently I’ve been taking off some long exposure and looking for short exposure. To hedge. Because the rally’s been nice and steady for a very long time. And the bulls who were once almost all scared back in July have become complacent and are heading quickly towards cocky.

Meanwhile, the bears are wounded and some are starting to doubt their own permabear case. They’re thinking they’ve got to step out of the away while the Fed’s latest welfare program for banksters and the biggest corporations on the planet, a.k.a. QE2, gets ready to work (or not).

But the fact remains that earnings have been strong this earnings season. And more importantly to traders, stocks are responding to those strong earnings.

So how to hedge right here, right now with the DJIA within 3% of multi-year highs? What if you’re not just worried about a pullback, but you’re also worried that the anarchy that mortgage contract law has become as a result of bailing out fraudulent banksters is going to tank our economy?

Step back for a minute there and let’s think this through, because much of our answer is actually in the question: if we’re worried about a meltdown and you know that the meltdown, were it to happen, would almost assuredly come from one specific sector of the economy, then should you be short that sector?

On the other hand, as any reader of this blog knows, I’ve been pounding the table on making sure you catch some of this incredible secular growth that’s happening in the app world. Sure, if banking implodes again because they can’t foreclose and have to eat their losses from the lending and also eat the securities that investors are going to be putting back to them, then demand for iPads might take a bit of a hit for a while in this country and maybe in Europe too. And sure, maybe if banking implodes again because they can foreclose and the price of housing craters again along with office real estate, then it’ll take a ten years instead of six years for Android to have moved its one billionth unit.

But then again, doesn’t that mean that Android will still have shown huge growth in the next ten years? Do we really think Google’s already priced in a billion Android units captured by ever-more-profitable Google ads? If that takes ten years instead of six, does that mean Google will crash from these levels over that decade?

More likely, it means that Google just won’t have hit my $2000 target by 2020. But in the worst case scenario, Google will still have grown its cash flow and earnings over the next decade and that means the stock will likely be higher in 2020 than it is in 2010. Same goes for Apple. Probably the same goes for Nokia and Microsoft, though, their next ten years are harder to see through, no?

But you can’t say the same about the banks now can you? No, the banks could implode tomorrow. We could finally see some attorney general who’s not completely captured by the Republican/Democrat Regime and its bankster benefactors actually start prosecuting and then rolling the lower-level managers and sales people who perpetrated fraud at these banks until we finally see some criminal prosecutions and prison sentences for CEOs who are now trying to cover their asses. Or we could see main street finally rise up and demand that the Fed stop using “economic concerns” as a justification for more welfare (“quantitative easing”) for the banks. Or we could see some brave regulator actually do his job and stop the banks from front running their clients in the name of “high-speed” trading. Or we could see the banks broken up as my old friend William Black smartly proposes.

But what’s the best case scenario for the banks again? Lots more welfare and taxpayer largesse and regulators turning their eyes on trading systems that game the systems for an ever larger piece of the average trader’s pie?

So let’s tie this column up here today by pointing out the obvious pair trade that’s been working beautifully for subscribers to Revolution Investing and that pretty much looks set to continue playing out over the next five to ten years – Long apps, short banks.

I’ve got several long ideas on the network infrastructure that enables the app revolution already in the Revolution Investing model portfolio and we’ve got some big gains on them. And I’ve also got several short ideas in the bankster sector and we’ve got some nice gains on them too. You can sign up for my weekly Revolution Investing newsletter for $99 for the first year and $199 annually thereafter by visiting http://marketwatch.com/cody to get all the specific stocks I’ve highlighted for subscribers.

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About The Cody Word

Cody Willard writes the Revolution Investing investment newsletter for MarketWatch and posts the trades from his personal account at TradingWithCody.com He is the founder of WallStreetAll-Stars.com and the principal of CL Willard Capital. Cody serves as an adjunct professor at Seton Hall University and is on the University of New Mexico Alumni Board. He was an anchor on the Fox Business Network, where he was the co-host of the long-time #1-rated show on the network, Fox Business Happy Hour. Cody, a former hedge fund manager, and his stock picks and economic outlooks have been featured on NBC’s The Tonight Show with Jay Leno, ABC’s 20/20, CBS Evening News, CNBC’s SquawkBox, Jon Stewart’s The Daily Show, as well as in the Financial Times, Wall Street Journal, New York Times, and many other outlets.